Labour charges cannot be disallowed in the presence of proper attendance registrar and wages account

IN THE INCOME TAX APPELLATE TRIBUNAL “SMC” BENCH: KOLKATA

[Before Smt. Diva Singh, Hon’ble Judicial Member]

I.T.A. No.817/Kol/2012

Assessment Year: 2008-09

Delta Construction

C/o Shri Somnath Ghosh, Advocate

Seven Brothers’ Lodge,

P.O. Buroshibtala, Chinsurah

Hooghly, Pin-712 105

(PAN: AACFD 1989K)

(Appellant)

–Vs.-

ITO, Ward-1, Raiganj

 (Respondent)

Date of concluding the hearing: 22.08.2012

Date of pronouncing the Order: 22.08.2012

Appearances: For the Appellant : Shri Somnath Ghosh

For the Respondent: Sri D.J. Mehta, Sr. DR

O R D E R

This is an appeal filed by the assessee against the order dated 15.03.2012 of Commissioner of Income Tax (Appeals), Jalpaiguri pertaining to the assessment year 2008-09 on the following grounds:

“1. FOR THAT the Ld. Commissioner of Income Tax (Appeals) Jalpaiguri acted unlawfully in upholding the assessment order framed u/s. 143(3) of the Income Tax Act, 1961 by the Ld. Income Tax Officer, Ward 1, Raiganj passed in gross violation to the provision of s.143(2) of the Income Tax Act, 1961 and also infringes the Instruction No. 241/23/70 dated 23-10- 1970 issued by the’ Central Board of Direct Taxes in this respect and., such action on that behalf is ab initio void, ultra vires and ex-facie null in law.

2. FOR THAT the Ld. Commissioner of Income Tax (Appeals) Jalpaiguri acted unlawfully in upholding the alleged disallowance resorted to by the Ld. Income Tax Officer, Ward 1, Raiganj in the sum of Rs.1,01,754/- in respect of expenses claimed under “Labour Charges” on the specious ground “to curb the possibility of revenue leakage” without adducing any adverse evidence on record and his purported action on that behalf is altogether arbitrary, unwarranted and perverse.

3. FOR THAT on the facts and in the circumstances of the instant case, the Ld. Commissioner of Income Tax (Appeals) Jalpaiguri gravely erred in upholding the impugned disallowance amounting to Rs. 4,438/- in respect of “Office Expenses” on a tenuous premise of being “excessive” by the Ld. Income Tax”

2. The ld. A.R., inviting attention to the copy of the Board’s Instruction No.241/23/70 dated 23.10.1970, submitted that the assessment order is contrary to the said Instruction as the hearing in the said case closed on 3rd November, 2010 and the order was passed on 06.12.2010. Referring to the said Instruction, the ld. A.R. stated that it is stated therein that in case the orders are not passed immediately as in complicated cases or those involving the handling of voluminous materials, it may not be possible to pass an order immediately after the hearing, even in such cases the order should be passed within 14 working days from the last date of hearing. In regard to ground nos. 2 and 3, the argument was that the assessee had claimed labour charges, duly supported by Labour Attendance Register and Wages A/c. wherein the AO had the apprehension that there is bound to be a revenue leakage of 5% of the expenses. Similarly, in regard to the head office expenses, he made an ad hoc disallowance 10% of such expenses and in appeal the said additions were upheld. Referring to the submissions placed in pages 1 to 5 of the paper book, he stated that the said addition is contrary to the settled legal position. Reliance was placed upon the paper book containing submissions advanced before the CIT(A); copy of ledger account of labour charges and copy of labour attendance and wages register (pages 9 to 57 of the paper book). Copy of ledger account of office expenses (pages 58 to 60 of the paper book) etc. so as to contend that no discrepancy was pointed out by the AO which the assessee was required to explain as such the additions it was argued deserves to be deleted.

3. The ld. Sr.DR, Shri D.J. Mehta, in regard to the first ground, stated that no doubt the order was passed beyond 14 days, however, Instruction No.241/23/70 does not make the actions of the AO bad in law. Referring to ground nos.2 and 3, the ld. Sr.D.R. placed reliance upon the orders of the authorities below. However, when he was required to point out, he was, apart from the observations made by the AO, not in a position to say anything more.

4. Having heard the rival submissions and perused the materials available on record, it is seen that the AO estimated the disallowance to be made on account of the following reasons:

“Assessee firm had debited expenses of Rs.20,35,085/- under the head ‘Labour charges’. In support of this expense, A/R produce labour attendance register with wages account. To curb the possibility of any revenue leakage,5% of such expenses of Rs.20,35,085/- which comes to Rs.1,01,754/- is disallowed and added to the total income of the firm. Assessee firm debited Rs.44,376/- under the head ‘office expenses’ which seems excessive considering the work done by the firm. Hence, 10% of such expenses of Rs.44,376/- which comes to Rs.4,438/- is disallowed and added to the total income of the firm.”

4.1 On perusal of the same it is seen that no reasoning or basis for making disallowance has been made apart from suspicions. The said action has been upheld by the CIT(A). On consideration of the entire facts and materials and the settled legal position, I am of the view that the said action cannot be supported in law as in the face of fully vouched and verifiable expenses, as per the claim of the assessee, which has not been rebutted by the revenue and where the assessee has maintained the Attendance Register of labourers shown the ledger account of labour charges and office expenses, which were all duly produced before the AO and also placed before us which contained the details of wages paid to and accepted by the labourers, no defect in the same has been pointed by the revenue. The action to make the ad hoc disallowance @5% qua the same and 10% in the case of office expenses on the reasoning that “to curb the possibility of revenue leakage” and “seems excessive” respectively is arbitrary which cannot be supported in law. Hence, addition so made of these disallowances by the AO, which has been upheld by the CIT(A), cannot be sustained. Accordingly, ground nos. 2 and 3 are allowed. In regard to ground no.1, which has been half-heartedly argued by the ld. A.R., the same is rejected and the department’s argument in this regard stands accepted. Therefore, the appeal of the assessee is partly allowed.

5. In the result, the appeal of the assessee is partly allowed.

The said Order was pronounced in the open court on 22.08.2012 in the presence of the parties on the date of hearing itself.

                                                                     Sd/-

                                                              (Diva Singh)

                                                           Judicial Member

Dated: 22/ 08/ 2012

Copy of the order forwarded to:

1. Delta Construction, C/o Shri Somnath Ghosh, Advocate, Seven Brothers’ Lodge, P.O. Buroshibtala, Chinsurah, Hooghly, Pin-712 105

2 ITO, Ward-1, Jalpaiguri

3. CIT(A)-

4. CIT-

5. DR, Kolkata Benches, Kolkata

(True Copy)

By Order

Assistant Registrar, I.T.A.T., Kolkata.

Talukdar/Sr.P.S.